There’s been a lot of confusion about eligibility for the Employer Retention Credit (ERC). The general belief is that everyone is eligible, but the reality is more complex. Two specific entities often overlooked are recovery startup businesses and non-profits.

Recovery Startup Businesses and Non-Profits

Recovery Start Up Businesses are entities that began operations during covid, but weren’t in existence in 2019.There are specific rules that define what is and is not a recovery startup business.. If a taxpayer started a new trade or business after February 15, 2020, they might be eligible for the recovery startup credit in Q3 and Q4..

Tax-exempt organizations, including 501(c)(3) entities, also qualify for the ERC. These organizations are considered a trade or business under a special exception in the CARES Act. Many are surprised that a non profit entity can be eligible for tax credits, as most non profits pay no federal income tax and are not considered to have a “profit motive”, which is a critical component of defining a “trade or business”. 

The Definition of Trade or Business

You might wonder why the definition of “trade or business” is so crucial. The term has been the subject of numerous legal controversies and lawsuits over the years. The IRS has scrutinized fraudulent activities where some individuals created businesses and hired people without any profit motive, solely to claim the ERC. This fraudulent behavior led to tighter compliance measures. Clearing defining a “trade or business” is critical to establishing eligibility to claim the ERC.

Disclaimer: We want to remind you that while we do have expert tax attorneys and tax professionals working on our team and for our clients, this blog is not legal or tax advice. But we do want to help. Reach out and schedule a time to speak with me or one of my teammates to review your unique set of facts and circumstances and see how we might be able to help you.

If you have any questions or think you may be eligible, click here to schedule your assessment.